Ask the expert: Alternatives to rolling over at today's CD rates
December 15, 2010
Q: I have a five-year CD rate maturing and I just can't see rolling into another long-term CD at today's CD rates. My bank's best offer for a five-year CD is less than two percent. What other options should I consider?
A: These days, rolling over a CD feels more like rolling over and playing dead. According to the FDIC, five-year CD rates now average just 1.56 percent, and though the best CD rates are above two percent for five-year terms, they are still a far cry from where rates were five years ago.
So, what options do you have these days when a long-term CD matures? Obviously, there are scores of investment possibilities you could consider, but assuming you want to keep a similar risk profile--i.e., a guaranteed instrument in an FDIC-insured account--your options are somewhat limited by the current rate environment. Still, you do have these choices to consider:
- Stay short-term. If you believe interest rates can't possibly stay this low for long, consider savings accounts or money market accounts that will adjust quickly as rates rise. You won't get much in the way of rates--savings account rates average 0.17 percent nationally, and money market rates average 0.23 percent--but your main purpose in staying short-term is to have the flexibility to adjust when rates rise.
- Go long with the best CD rates you can find. If you want the best rates you can find under today's circumstances, then you'll want to go with another long-term CD. Just make sure you shop for the best CD rates you can find, rather than simply accepting what your current bank offers.
- Hedge your decision with an intermediate-term CD. Straddling the fence will get you a little higher rate than short-term deposits, without locking you up for as long as a five-year CD.
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